The sleepy Prague stock market may see it first-ever IPO

Stock Exchange

Insufficient corporate governance, convoluted legislation, low investor interest — and, in the early days, the availability of easy loans with few questions asked — have for over a decade made the Czech bourse the last place domestic companies went to raise cash. That may be about to change.

The Czech-branded generic drugs maker Zentiva announced last week that it would seek to raise at least 2.7 billion crowns — $100 million — in new equity on the Prague Stock Exchange.

If the Zentiva issue is successful — and market analysts say all signs show it will be — it would be the first ever initial public offering, or IPO, that the sleepy Prague bourse has seen since the first session took place on its trading floor in April 1993.

The head of research at the Atlantik brokerage house, Jan Schiesser, says that 10 years may seem like a long time not to see an IPO, but for an economy in transition, like the Czech Republic, it is par for the course. The Hungarian and Polish stock markets, for example, have so far only seen a handful of them.

Mr Schiesser says that one major reason that the Czech bourse has not yet seen an initial public offering is that for most domestic companies it that until now it hasn't been the cheapest way to raise capital.

"This environment, or this situation among the banks, are actually not very favourable for an IPO because there is excess liquidity, interest rates are low. So, probably, for most companies it is better to get a loan rather than to go to the capital markets to raise capital — because that is relatively more expensive."

Zentiva, which is majority-owned by private equity firm Warburg Pincus, is already one of the top five drug firms in Central and Eastern Europe. The firm's pro forma sales reached $357 million and its operating profit stood at $79 million in 2003.

With the money it hopes by floating the issue, Zentiva intends to expand further into the region and will use the proceeds in part to finance the acquisition of another drugs company, Slovakofarma.

Why Zentiva may succeed where others have failed is that for an IPO to be successful, the size of the company is a major factor, says Jan Hajek, an equities analyst with the Patria Finance brokerage.

"This is a really key question because first the company must be of some minimum size to be attractive for investors. And the smaller the company the more expensive floating the issue on the market is. So therefore you need a pretty large company, in terms of the Czech Republic."

Zentiva intends to launch shares both in Prague and as global depository receipts, or GDRs, to be traded on the London Stock Exchange. The floatation could value the company at up to $900 million.

Analysts say previous attempts at IPOs on the Prague bourse failed due to the inexperience of local lead managers, poor liquidity and weak trading mechanisms.

But some big financial guns like Merrill Lynch will be handling the Zentiva floatation and analysts say they believe it will succeed. Czech traders and equity analysts are rather excited about the issue, says Jan Langmajer of the Atlantik brokerage.

"It's definitely great news because there are only some seven stocks which are actively traded now. We think that it [Zentiva] could have the same liquidity as, for example, Unipetrol or Ceske radiokomunikace, it's the same size. The free floatation of $100 million — it's enough."

The Prague Stock Exchange got off to a roaring good start: in 1993, nearly 2,000 firms were listed, albeit through the Czech government's ultimately flawed coupon privatisation programme. More than 1,500 companies have since delisted because of low liquidity, or were taken off the market by new owners.

As Mr Langmajer just noted, trading is focused on just seven blue chip companies. The bourse's average daily turnover has fallen by more than 50 per cent from around $50 million in the year 2000.

The Zentiva IPO could help inject much-needed new life into the bourse, says Mr Hajek of Patria Finance, and it comes at a good time — on a wave of foreign interest after the Czech entry into the European Union.

"Now there is the issue of EU accession and there is a huge interest in Central Europe, in the entire region. So now definitely is the right time to bring the IPO on the market."

"It may be that we just need some kind of example — and Zentiva might be that example — and once there is a successful IPO on the market, then several other companies may decide to be floated also."

A round-up of the week's business and economic news in brief

Deputy FM sacked over alleged ties to secret police (StB)

Finance Minister Bohuslav Sobotka this week sacked his deputy minister, Jaroslav Sulc, after the business daily Hospodarske noviny reported that the former Czechoslovak secret police sevice, the StB, had used Sulc's postal address as a "drop box".

Mr Sulc is one of the highest-ranking government officials ever identified as a former collaborator with the secret police. As deputy minister, he was in charge of pricing policy, rent deregulation and the lotteries.

Mr Sulc has said that while he was a "loyal" employee of the former regime he denies knowing that the person using his address was working for the StB.

Sazka betting on a favourable rating

The lottery company Sazka hopes to get a rating from international agency Moody's Investor Service within several weeks. Such a rating could help the company get more favourable conditions from lenders when it seeks to restructure its bond issue.

If Moody's does not issue the rating by the end of this month, Sazka's owners said the betting company will approach a rival firm, Standard & Poor's.

Czech Republic has highest social taxes of new EU members ...

In other news, the Czech Republic and Slovakia have the highest social taxes of the 10 new European Union member states, according to a survey by the consulting firm KPMG. In the Czech Republic, these taxes come to 47.5 per cent, compared to 12.6 per cent in Cyprus.

... and highest bank fees in Central Europe

Meanwhile, a separate report found Czech banks charge the highest fees in the Central and Eastern European region. According to research by the Boston Consulting Group, weak competition on the Czech banking market is the reason.

The global consulting group pointed to the dominance of three big banks — Ceska Sporitelna, Komercni Banka and CSOB — as the reason fees aren't lower for clients. The Big Three control two thirds of the market, while tougher competition on the Polish and Slovak markets pulls prices of banking services down.